TVA Prevents a CA Turnover Order by Filing Suit in NV

Even if you’re on the right track, you’ll get run over if you just sit there. —Will Rogers

You might have the law on your side, but it is not enough to be right — you also have to be first. That is what took TVA recently to the Nevada-side of Lake Tahoe, in Washoe County.

Our client had a multimillion-dollar judgment against him, and everyone knew the judgment creditor was after our client’s stock in a valuable real-estate corporation to take control of the assets before we could reverse the judgment (and we did). And under California law, the creditor might have been able to do so, as a judgment debtor’s stock may be subject to a turnover order.

Fortunately, the company was incorporated in Nevada, which affords generous shareholder protections, and specifically, a bar against turnover orders. Nevada Revised Statute 78.746 is a first-of-its-kind shareholder protection that makes a charging order the exclusive remedy against corporations with fewer than 100 stockholders of record at any time. Nevada was the first state to extend charging-order protection to corporate stock. Moreover, Nevada Senate Bill 405, which passed the state senate by a vote of 21-0 and the assembly by a vote of 42-0, specifically extended that protection to single-stockholder corporations as well. Nevada’s legislature intended its cutting-edge NRS 78.746 to attract business from beyond its borders, and particularly its long border with the most populous state in the nation.

Moreover, Nevada’s NRS 78.746 shareholder protection should apply no matter where enforced under what is known as the internal-affairs doctrine. “The universal rule is that internal affairs of a corporation, including “defining the attributes of shares … and protecting shareholders,” CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 94, 107 S.Ct. 1637, 1652, 95 L.Ed.2d 67 (1987), are governed by the law of the corporation’s domicile. Traditionally this led courts of equity to decline to hear matters concerning the internal affairs of foreign corporations even though in personam power was present, see 17 W. Fletcher, Cyclopedia Corporations, § 8425, et seq. (1982), although this rule has been relaxed in modern times. Id.”  Hynson v. Drummond Coal Co., Inc., 601 A.2d 570 (Del. Ch., 1991)

So the law was on the shareholder’s side.

But there was a complication: California, contrary to the internal-affairs doctrine, adopts a policy that tends to ignore the laws of the state of incorporation where necessary to confer benefits to California residents that a judge might deem important. “[California] courts are less apt to apply the internal affairs doctrine when vital statewide interests are at stake, such as maintaining the integrity of California security markets and protecting its citizens from harmful conduct. In contrast, … when less vital state interests are at stake (e.g., whether a foreign corporation headquartered in another state pays promised dividends to its shareholders, or whether the shareholder of a foreign corporation must fulfill certain procedural requirements set before bringing a derivative suit), courts are more apt to apply the internal affairs doctrine.”  Lidow v. Superior Court (2012) 206 Cal.App.4th 351, 362 [141 Cal.Rptr.3d 729, 736].

Thus, if the judgment creditor were able to convince a California court that Nevada law would permit “harmful conduct,” or that a turnover order otherwise promoted a more “vital state interest” than did Nevada’s shareholder protections, a turnover order could issue.

In other words, despite the bar under Nevada law, the judgment creditor was likely to seek a turnover order in California by urging the policy of California should prevail over NRS 78.746.

Rather than give plaintiff that opportunity, TVA filed a complaint in Nevada seeking a declaration from the court that Nevada’s shareholder protection under NRS 78.746 applied. We argued that where the Nevada court has jurisdiction, as here, it ought not to defer to another forum by assuming – naively – that California would give the Nevada law its intended effect. Instead, the important and unique Nevada policy concerns are best protected by Nevada courts.

Predictably, the judgment creditor filed a motion to dismiss. The court heard arguments based on the Constitution’s Full Faith and Credit clause, and the hoary doctrine of quasi in rem jurisdiction under Pennoyer v. Neff, and considered whether the court could assert jurisdiction over the stock alone, and whether it could take jurisdiction over the California creditor.

But the key question the Nevada court asked was: “Is the in rem portion of this suit ripe for judgment as there has not to this point been any execution efforts taken against the property at issue?” That is, the judgment creditor had never tried to evade Nevada’s shareholder protections, as TVA had beaten him to it. So the court put the judgment creditor on the spot: Is that your intention?

Put on the tines of this fork, the judgment creditor was forced to admit that, if he later decided to seize the stock, he would be subject to Nevada law. Had he done otherwise and disputed that NRS 78.746 applied, his motion to dismiss would have been denied and the court would have made a declaration of the law as TVA requested.

The judgment creditor’s concession was just as effective — more so, in fact, since it made unnecessary any further litigation on the issue. The Nevada court dismissed the case without prejudice, and the judgment creditor, now foreclosed from denying Nevada law applied, sought the lesser charging-order relief available under NRS 78.746 from the California court.

Justice favors the quick.